Drive Capital’s second act –  how the Columbus venture firm found success after a split

The enterprise capital world has at all times had a hot-and-cold relationship with the Midwest. Traders rush in throughout increase occasions, then retreat to the coasts when markets flip bitter. For Columbus, Ohio-based Drive Capital, this cycle of consideration and disinterest performed out towards the backdrop of its personal inner upheaval a number of years in the past — a co-founder split that would have ended the agency however could have finally strengthened it.

At a minimal, Drive achieved one thing newsworthy in at the moment’s enterprise panorama this previous Might. The agency returned $500 million to traders in a single week, distributing practically $140 million price of Root Insurance coverage shares inside days of cashing out of Austin-based Considerate Automation and one other undisclosed firm.

It may very well be seen as a gimmick, certain, however restricted companions had been undoubtedly happy. “I’m unaware of another enterprise agency having been in a position to obtain that type of liquidity not too long ago,” stated Chris Olsen, Drive’s co-founder and now sole managing accomplice, who spoke to TechCrunch from the agency’s workplaces in Columbus’s Brief North neighborhood.

It’s a outstanding turnaround for a agency that confronted existential questions simply three years in the past when Olsen and his co-founder Mark Kvamme — each former Sequoia Capital companions — went their separate methods. The break up, which stunned the agency’s traders, noticed Kvamme ultimately launch the Ohio Fund, a broader funding automobile targeted on the state’s financial improvement that features actual property, infrastructure, and manufacturing alongside expertise investments.

Drive’s latest success stems from what Olsen calls a intentionally contrarian technique in an business preoccupied with “unicorns” and “decacorns” — corporations valued at $1 billion and $10 billion, respectively.

“When you had been to simply learn the newspapers or hearken to espresso retailers on Sand Hill Street, everybody at all times talks in regards to the $50 billion or $100 billion outcomes,” Olsen stated. “However the actuality is, whereas these outcomes do occur, they’re actually uncommon. Within the final 20 years, there have solely been 12 outcomes in America over $50 billion.”

Against this, he famous, there have been 127 IPOs at $3 billion or extra, plus lots of of M&A occasions at that stage. “When you’re in a position to exit corporations at $3 billion, then you definitely’re in a position to do one thing that occurs each single month,” he stated.

That rationale underpinned the Considerate Automation exit, which Olsen described as “close to fund-returning” regardless of being “under a billion {dollars}.” The AI healthcare automation firm was offered to personal fairness agency New Mountain Capital, which combined it with two other companies to kind Smarter Applied sciences. Drive owned “multiples” of the standard Silicon Valley possession stake within the firm, stated Olsen, who added that Drive’s typical possession stake is round 30% on common in comparison with a Valley agency’s 10% — actually because it’s the sole enterprise investor throughout quite a few funding rounds.

“We had been the one enterprise agency who invested in that firm,” Olsen stated of Considerate Automation, which was beforehand backed by New Mountain, the PE agency. “About 20% of the businesses in our portfolio at the moment, we’re the only real enterprise agency in these companies.”

Portfolio Wins and Losses

Drive’s monitor file consists of each massive successes and likewise stumbles. The agency was an early investor in Duolingo, backing the language-learning platform when it was pre-revenue after Olsen and Kvamme met founder Luis von Ahn at a bar in Pittsburgh, the place Duolingo is predicated. Immediately, Duolingo trades on NASDAQ with a market cap of practically $18 billion.

The agency additionally invested in Huge Information, an information storage platform final valued at $9 billion in late 2023 (and is reportedly fundraising proper now), and Drive made cash on the latest Root Insurance coverage distribution regardless of that firm’s rocky public market efficiency since its late 2020 IPO.

However Drive additionally skilled the spectacular failure of Olive AI, a Columbus-based healthcare automation startup that raised over $900 million and was valued at $4 billion earlier than ultimately promoting parts of its enterprise in a hearth sale.

“You have got to have the ability to produce returns in dangerous markets in addition to good markets,” Olsen stated. “When markets actually get examined is when there’s not as a lot liquidity.”

What units Drive aside, Olsen argues, is its deal with corporations constructing outdoors Silicon Valley’s hyper-competitive ecosystem. The agency now has workers in six cities — Columbus, Austin, Boulder, Chicago, Atlanta, and Toronto — and says it backs founders who would in any other case face a alternative between constructing close to their clients or their traders.

It’s Drive’s secret sauce, he suggests. “Early-stage corporations which might be primarily based outdoors of Silicon Valley have a better bar. They need to be a greater enterprise to garner a enterprise funding from a enterprise agency in Silicon Valley,” Olsen stated. “The identical factor applies to us with corporations in Silicon Valley. For us to spend money on an organization in Silicon Valley, it has a better bar.”

A lot of the agency’s portfolio facilities not on corporations making an attempt to provide you with one thing completely novel, however as a substitute on these making use of tech to conventional industries that coastal VCs may overlook. Drive has invested in an autonomous welding firm, for instance, and what Olsen calls “next-generation dental insurance coverage” — sectors that arguably signify America’s $18 trillion financial system past Silicon Valley’s tech darlings.

Whether or not that focus — or Drive’s momentum — interprets into a giant new fund for Drive stays to be seen. The agency is presently managing property that it raised when Kvamme was nonetheless on board, and in response to Olsen, it has 30% left to speculate of its present fund, a $1 billion vehicle introduced in June 2022.

Requested about cash-on-cash returns up to now, Olsen stated that with $2.2 billion in property beneath administration throughout all of Drive’s funds, all are “high quartile funds” with “north of 4x web on our most mature funds” and “persevering with to develop from there.”

Within the meantime, Drive’s thesis about Columbus as a reliable tech hub obtained additional validation this week when Palmer Luckey, Peter Thiel, and different tech billionaires introduced plans to launch Erebor, a crypto-focused financial institution headquartered in Columbus.

“After we began Drive in 2012, folks thought we had been nuts,” Olsen stated. “Now you’re seeing actually the folks I consider as being the neatest minds in expertise — whether or not it’s Elon Musk or Larry Ellison or Peter Thiel — transferring out of Silicon Valley and opening huge presences in several cities.”